Should Investors Be Worried About Amazon After Its Lackluster Q3 Report?

Amazon (AMZN -1.14%) disappointed some investors with its most recent earnings report. But should this change investors' long-term assessment of the e-commerce and tech giant? In this segment of Backstage Pass, recorded on Nov. 1, Fool contributors Rachel Warren, Toby Bordelon, and Connor Allen discuss. 

Rachel Warren: Shares of Amazon fell 4% last Friday after the tech company missed analysts estimates for both the top and bottom line results. We're also delivering less than stellar guidance for the fourth quarter.

Amazon reported its results for the third quarter of 2021, after market close on Thursday, Oct. 28, and net sales increased 15% year-over-year. That was not bad. But where investors, were more concerned was net income was down.

Amazon also reported that operating cash flow and free cash flow were both down for the trailing 12 months.

Net profits were down more than 50% year-over-year, and then another kind of sticky point for investors, Amazon said that operating income for the fourth quarter, so the last quarter of the year could hit in the ballpark of anywhere from $0-$3 billion.

A pretty big range. The companies cited kind of a range of factors including the slowed growth in online shopping compared to the earlier days of the pandemic, as well as ongoing supply chain constraints as some of the issues that play here.

Here's my question. I don't know if either of you are invested in Amazon. I personally I'm. Does this report concern you at all about the future of Amazon in a post-pandemic world. Do you think this could perhaps spell a wider slowdown on the e-commerce industry. Toby, what do you think?

Toby Bordelon: I'm invested in Amazon like you. I'm thinking of a scene from pulp fiction which I will refrain from quoting because it's a family show. But $0-$3 billion. That's a big ballpark. I mean, it's almost like we have no freaking idea. Just who knows. That's huge. I do have a few concerns, at least for the short-term.

We think of Amazon is one of the big tech giants, a FAANG company. But now we're rethinking that acronym because of Facebook's thing, but you've put them in that same bucket often with Apple, Microsoft, Alphabet. I think though this report is hammered home, the reality that they are very much a retailer.

They are tied to retailer in a way that none of those others are. Then beyond that, AWS right now is lagging Azure in terms of growth. Now there's still larger, but the growth rate is coming down compared to Microsoft. 

They're making heavy investments in CapEx, not necessarily expect from a huge tech company, but they have to do that. There have increasing costs of tight labor market. These are all mean higher operating costs for them. They are a retailer. We can't forget that, they got to deal with the same things every other retailer does right now.

They're struggling, now I think it's really great company, you know, there's some positives, ad revenues up, increasing, I think 50%, they've said for the quarter.

Their AWS is still a force to reckon within that market. It might be lagging right now, grows behind Microsoft Azure, but it's a huge player, you can't ignore that. I think the company is going to be fine long term. But they're in the retail business, they sell stuff and they have to get you that stuff, and that's difficult to do right now, and that's what we're seeing.

Connor Allen: I think they're going to be fine as well, Toby. Obviously in the past lifetime of Amazon over the past 20 years, they've captured a ton of market share. When you do that, obviously at some point your growth is going to slow.

They've been expanding into different businesses. But I want to say what I'd say to Netflix shareholder expectations when you talk about subscriber growth, subscriber growth for Netflix over the past few quarters has been disappointing to a lot of shareholders. Well, when you got everybody in America already subscribed, then, it's tough to grow from that.

I'm not concerned about Amazon moving forward that much. I think in the next few years, we're going to look back at this quarter with a lot of big tech reporting bad earnings and they're going to be like that would've been a great time to buy. I don't think you should be selling on any of this news. 

But I expect it to be a great company in the next few years. We may see a slowdown of growth, we may not. Part of me thinks that we are going to see a little bit of a slowdown, but slowdown for Amazon is still a lot better, probably what a lot of companies would want to have. I think they're going to be just fine.

Rachel Warren: Now, I agree. I also think it's important to look beyond one quarter. We obviously, if see this maybe for several quarters. I think investors might have a little more cause, not even necessarily to be concerned about the company's long-term prospects, I think that Amazon has [laughs] shown that it can weather its fair share of storms and come out on top.

But I think it makes sense. I saw there was a statement that the CEO of Amazon had released saying that in the upcoming fourth quarter, they're expecting to incur a lot of costs.

Going back to, he said, "As we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased rate in shipping costs all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season."

I think that investors maybe should expect to see perhaps maybe another bumpy quarter or so. But again, like what Toby was saying, its cloud business, for example, Amazon Web Services is still growing strong. That segment growth acceleration was up nearly 40% year-over-year in this most recent quarter.

I think Amazon has shown that it has this very exceptional ability to innovate in amid changing environments, changing markets, amid the changing retail environment.

One of the things that I really like about this company and one of the reasons that I personally I'm a share owner, is because I think that Amazon has such a diversified business and it is always going into these new industries and new spaces and continuing to come out on top. I'm not concerned so much in the near term. I also think this makes sense.

In the short term, companies are readjusting to the post-pandemic-ish world. E-commerce sales are booming, that is an area that Amazon is particularly known for and the e-commerce industry as a whole is expected to realize tremendous growth over the next decade alone.

But I think it's also reasonable to expect that growth may slow in some ways compared to how it was in the earlier days of the pandemic. I also think that the fact that Amazon is seeing some of the slowdown is also a testament to just how dire the supply chain crisis is.

When it can affect a company of this magnitude that is typically so resilient. Actually, I saw this headline earlier that said something like the supply chain crisis is essentially raining in Amazon when regulators cannot. [laughs] I think that this is something that Amazon can come through. I think it might just take a little bit of time.